Tony Daltorio: Since legendary investor Warren Buffett took a liking to solar this year, investors have been wondering if it’s time to revisit this beleaguered industry when looking for stocks to buy in 2013.

The solar sector has endured a beatdown for about two years, with massive oversupply of solar panels and unfavorable publicity combining to keep solar stocks down.

MidAmerican announced a $2 billion to $2.5 billion deal to buy two California solar power projects from SunPower Corporation (NASDAQ:SPWR). MidAmerican also agreed in January to invest in what will be the world’s largest solar photovoltaic operation, which is partly owned by First Solar Inc. (NASDAQ:FSLR).

Many solar stocks and solar ETFs, including Market Vectors Solar Energy (NYSEARCA:KWT) and Claymore/MAC Global Solar Index (NYSEARCA:TAN), have soared on the MidAmerican news. They’re both up about 17% this year.

Does this mean investors should follow Buffett into solar stocks? Here’s a look at the sector.

Let’s Look at Supply Issues

A positive development for the solar sector is cutbacks in production of polysilicon, which is one of the basic materials used to build solar panel modules.

Major producers such as Germany’s Wacker Chemie and Hemlock Semiconductor, a division of Corning Inc.(NYSE: GLW), lowered their polysilicon output last quarter and plan to do so again this quarter.

That would remove a major oversupply issue for the sector, which was kept prices falling.

Another bright spot for the solar sector is rising demand from China, whose government set a target that will make the country the world’s largest installer of solar panels.

China is to double its rate of installations to a targeted rate of 10 gigawatts of solar power capacity this year, accounting for roughly a quarter of this year’s global demand.

China also is increasing its goal for solar power installations by 2015 to 35 gigawatts from the previous target of only 21 gigawatts.

China’s overproduction issues will also become less of a problem for the solar industry.

Chinese overproduction figures to fall this year because Beijing is growing weary of pouring money into its struggling solar industry. At the end of 2012, the State Council, China’s cabinet, said it would encourage mergers and acquisitions among its solar companies by using “market pressure mechanisms.”

This news from China and elsewhere led analysts Aaron Chew and Francesco Citro of Maxim Group to issue an optimistic forecast for solar demand. The analysts said demand for solar photovoltaic panels could rise 18% this year to 38.2 gigawatts.

The Maxim Group analysts told BloombergNews the increased demand continues to be driven by “the severe collapse in module prices since 2011″ due to overcapacity.

The overcapacity issues are nearing a bottom, but will still weigh on solar panel prices and hurt companies that haven’t prepared.

Renewable power consultancy GTM Research says solar panel manufacturers still have a few years before the excess production capacity is completely eliminated. GTM believes roughly 21 gigawatts of production will be retired by 2015.

Three Solar Stocks to Buy that Will Outshine Competition

What does all this mean for investors in solar stocks?

It means now there are some solar stocks to buy – the better-run survivors that finally will begin to see some benefit from their endless efforts to cut costs and improve efficiencies. As their competitors struggle, these well-positioned companies will be able to service more of the growing demand for solar.

But you had better be choosy about which solar stocks you pick.

Here are three worth considering:

SolarCity Corp. (NASDAQ:SCTY) went public in December and is trading at all-time high, having nearly doubled in price to over $18. The company is an installer of solar power systems to all sorts of customers across the United States. In 2012, it deployed an above-expectations 156 megawatts. This was 117% above 2011′s deployment of just 72 megawatts.

SunPower has utility contracts worth $3 billion through 2016 and strong growth in Japan. Also in its favor is a streamlined manufacturing process, which leads to high gross margins of 15-23%, according to Lazard, which recently upgraded its rating on the company. SunPower’s stock price has increased more than 40% since Jan. 4, when Money Morning first reported on the company.

MEMC Electronic Materials Inc. (NYSE:WFR) is a silicon wafer company with a heavy emphasis on solar projects through its subsidiary SunEdison.SunEdison just sold two utility-scale projects to Canadian Solar Inc., with an option to buy three more in the future. Another positive sign: Two company insiders, one of them the CEO, bought stock in November. MEMC’s stock has increased about 35% since Money Morning first reported on it Jan. 4.

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